Climate Engagement leads to better Management

During the last months of 2016, Engagement International engaged on behalf of institutional investors with 28 of the 100 listed global companies that are contributing the most to climate change – now or potentially later, due to their fossil fuel reserves. About 40% of the companies have a clear commitment to the Paris Agreement and are explicit about their own responsibility to contribute to the two-degree-goal. However, in general, the highly exposed energy-, mining-, steel- and cement companies need to do much more. Two thirds have shown an increasing carbon emission intensity over the last five years. And a new set of very ambitious financial disclosure recommendations from the Financial Stability Board (FSB) will push not only these highly climate change exposed companies, but organisations in all industries to adopt a better management of their climate risks and opportunities.

The goal of our Climate Engagement efforts is to encourage companies in the client portfolios to adjust their business models and take appropriate actions to become a part of the transition to a low-carbon economy, in line with the Paris Agreement and the two-degree goal.

According to the Engagement International’s rating system, about 30% of the engaged companies show a High Level Management as regards climate related issues, 40% a Medium Level and about 30 % a Low Level. In general, it seems like the European companies we have engaged with have a higher level of management compared to engaged companies in other parts of the world, when it comes to addressing the climate change challenge. Seven out of the eight companies with a High Management Level are European, and all companies with a low management level are located outside Europe, especially in the United States, Russia and Japan.

However, the management level is one thing, another is the change or momentum. Here, about one third of the companies has shown a Positive or Very Positive Engagement Progress during the latest six months, as they seem to be on track and in line with the Paris Agreement and two-degree-goal. Another third are moving in the right direction, but too slow and to a Moderate extend, only.

Commitment to the Paris Agreement

About 40% of the engaged companies show a commitment to the Paris Agreement and are explicit about their own responsibility to contribute. But only 30% have long-term targets for carbon emission reduction. Nearly 60% show a high or moderate level of efforts, when it comes to board/top management climate change responsibility. About 40% show the same level of efforts regarding executives’ incentives related to climate measures. 40% of the companies show a high or moderate level of efforts using internal carbon prices, while about one third use these for project stress testing. One third has a transparent set-up regarding responsible lobbying and political spending.

Energy efficiency in operations or among end-consumers is the most widespread mitigation strategy, used by more than 90% of the engaged companies to a High or Moderate degree. Two thirds of the companies show the same level of management regarding renewables such as solar, wind, hydropower and biofuels/biomass. Other two thirds states that they are moving from higher to lower impact energy sources like from oil to natural gas. 60% are divesting from energy projects and sites that cannot stand internal stress tests using alternative carbon prices. 60% are active when it comes to carbon capturing and storing. Nearly 20% have nuclear energy as an element in their carbon mitigation strategies and two companies have moved to other business activities or reorganised their organisations by spinning off their fossil fuel activities.

New climate disclosure standard

However, in the coming years, the engaged top-climate-change-contributors have to step up their climate change management efforts, because of two main reasons: 1) Two thirds has shown an increasing carbon emission intensity over the last five years. 2) They have to comply with new very ambitious financial disclosure recommendations from the Financial Stability Board (FSB) that is in a public consultation process until February 12 and will be published in June. Although it is voluntary, it is expected to become the future standard for financial integrated reporting on climate issues, due to the very broad support from leading institutional investors, companies, standard setters and governments.

The climate disclosure initiative was launched just over a year ago by the British Central Bank Governor Mark Carney in his capacity as Chairman of the Financial Stability Board, whose main task it is to overlook global financial risks and coordinate efforts against these. He asked the Chairman of Bloomberg LD, Michael Bloomberg, to chair a committee of experts and representatives of the world’s largest investors and companies, in order to elaborate a set of voluntary recommendations for the future climate reporting.

The draft-result, published just before Christmas, is now supported by all the organisations represented in the Committee, which, among others includes highly exposed companies like BHP Billion, Tata Steel and ENI, the world’s largest asset manager BlackRock, Industry and Commercial Bank of China, the four major auditing companies, PWC, KPMG, Deloitte and EY. And in addition, the recommendations are supported by leading standard setters like GRI, PRI, IIGCC and CDP.

According to Mark Carney, the recommendations are solutions to the market, created by the market itself. It’s all about allocating capital to the right place, which does not happen sufficiently today, although there are already more than 400 different reporting standards regarding climate change. However, according to the Central Bank Governor, less than one third of the largest 1,000 US companies report on climate conditions in a comparable way.

Four main reporting area

The Task Force has developed four’general recommendations on climate-related financial disclosures that are applicable to organizations across sectors and jurisdictions: Governance, Strategy, Risk Management, Metrics and Targets. These core disclosures should be supplemented by more specific information from companies belonging to 12 highly climate exposed industries including energy, transport, materials, buildings, agriculture, food, forestry, insurance, banks, as well as capital owners and asset managers.

Governance: Here it is recommended that all companies and investors provide information on the extent to which the board of directors and top management is involved in monitoring and handling of climate conditions. In addition, it should be disclosed whether these considerations are included in crucial decisions about strategy, etc. Especially regarding energy companies, it is recommended to inform whether climate conditions influence the top management’s bonus pay.

Strategy: Here it is recommended to disclose the main risks and business opportunities arising from the climate change challenges in the short, medium and long term. Companies should also explain how to mitigate the risks and business opportunities affecting the business in relation to products, supply chain, manufacturing, research and development, business strategy and financial planning. Finally, it is recommended that all these considerations are seen in a dynamic perspective, in relation to various scenarios, not least including the two-degree-goal.

Risk Management: Here it is recommended that all companies and institutional investors disclose how they have identified and assessed the most important climate-related business risks and opportunities. In addition, it should be demonstrated how the organisation intends to deal with these and how they are taken into consideration in its overall risk management.

Metrics and Targets: Here it is recommended that all companies and institutional investors publish their “carbon footprint” in terms of scope 1 and 2 and if relevant scope 3 CO2 emissions. In addition, reporting should include the consumption of energy and water, hazardous waste, land use and the extent of new clean energy, to the extent it is relevant. Finally, it should be explained how the actual development of each area follow the established goals.